Victoria’s economic future lies in exporting services

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Bruce Rasmussen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

With the demise of manufacturing and without a product to sell internationally, the argument goes that non-resource states such as Victoria are fated to fall into recession in the short run, or experience a long period of declining real incomes.

For some the answer is a much needed infrastructure program targeting improvements in economic productivity. This is valuable but hardly a long-term strategy, nor one to employ the capabilities of a services economy like Victoria.

Because, while the headlines are full of manufacturing job losses, the rest of the Victorian economy has been generating services jobs. In the decade to 2013, during which there was a net loss of 50,000 manufacturing jobs, there were an additional quarter of a million jobs in health, education and professional services. Manufacturing jobs have fallen to 9% of the total while services jobs have grown to 77%.

This will be exacerbated by the closure of the motor vehicle manufacturing sector and as Sally Weller pointed out, dumping so many displaced workers on the labour market in a concentrated period is going to cause much misery amongst those retrenched. Hopefully there will government programs to assist them. With a lower dollar there will undoubtedly be other parts of the manufacturing industry that will find new export opportunities.

Right now the economy seems not to be in such bad shape. Housing, retail sales and improved business confidence are all leading to a significant recovery in job ads listed by the jobsearch website seek.com, which are up 12% since September last year in Victoria compared with the national average of 9%. If sustained by accommodating monetary and fiscal policy this will help with the manufacturing adjustment.

But what are the prospects for the rest of us who are employed in services jobs? One of the things our Institute has been looking at for the Victorian Government is the global trade in services.

Exporting services was once considered an oxymoron. Services needed to be delivered personally. There was no opportunity to deliver them remotely. The characteristics of services and the technology to deliver them have completely overtaken that notion.

What a wide-ranging study of the global services trade, delivered to the Victorian government last year, found is that exporting services is big business for everyone it would seem, except Australia and by implication, Victoria. In particular the developing economies of Asia, India and China have reached a stage of development where they have an increasing demand for sophisticated services, but currently lack the capacity to meet that demand domestically. Accordingly the imports of services by countries such as India and China are growing at 15-20% per annum. That may change, but right now there is an opportunity.

The prototype Australian services export entrepreneur is of course our humble underpaid academic cracking tough and unfamiliar markets rather than the bonus-driven management consultant. It is the universities that have established beach heads in culturally unfamiliar markets through partnerships with overseas institutions that have incorporated both offshore and onshore course delivery.

Education services have become a key component of our exports and in Victoria our universities are now some of the largest export organisations in the state.

As shown in the chart, the great success of Australian services exports to developing countries such as China and India has been in education. Travel services, of which education is the largest component, comprise about 90% of Australian exports to China and India (Victorian data for services exports to specific countries are not available).

While the export of education services, which until recently has been growing very rapidly (11.7% per annum between 2001 and its peak in 2009), exports of the strategically important professional services, in which as a service economy we have built a considerable capacity such as legal, accounting, management consulting, architectural, engineering and technical services represented in the trade statistics, as “other” business services is much lower. These are incorporated in “other” business services and make almost no impact on the chart.

While imports of other business services by China and India have grown at 17% and 12% per annum respectively over the period 2004-2012, Australian exports of other business services to China grew at only 3% over the same period. Australian exports of other business services to India were too small to generate a meaningful growth rate. While the data is far from complete, it appears that the United States has been successfully taking advantage of the opportunity presented by China. It is more difficult to identify the most successful services exporters to India, but Germany and the UK are prominent.

The poor local export performance has been exacerbated by the high Australian dollar but much of the explanation resides in non-price factors. There are many impediments to exporting services to Asian destinations, not the least are ones of cultural and language differences. However necessity is a great driver of determination and no more so in the education sector where the need for compensatory revenues has driven universities to become among the largest exporters in Victoria. The same may yet be so for a whole range of professional services.

This piece drew on Professor Rasmussen’s presentation to CEDA’s 2014 Political and Economic Overview.